Most stock splits don’t create actual value for shareholders. While investors end up with more (or less if it’s a reverse split) shares post-split, they own the same economic interest. It’s like taking one big pizza slice and cutting it in two, so it looks like it’s more, but it’s the same slice.
However, the upcoming split of Brookfield Asset Management (BAM 1.88%) is a bit different. Brookfield will split into two publicly traded companies — Brookfield Corporation and Brookfield Asset Management — with the latter poised to pay an attractive and growing dividend. That makes it a stock split that dividend investors won’t want to miss.
Details on the split
Brookfield Asset Management is a leading global alternative asset manager with over $750 billion of assets under management. The company also owns and operates a variety of businesses across the infrastructure, real estate, renewable power, and business services space. This dual focus on asset management and ownership makes Brookfield different from rival asset managers like Blackstone (BX 1.67%) and KKR (KKR -0.44%), which primarily concentrate on asset management. Brookfield believes the market isn’t fully valuing its asset management business or the assets it owns.
The company is addressing this situation by splitting off a quarter of its asset management business and distributing it to shareholders. It will retain the other 75% of the business. Brookfield plans to complete this unique stock split in early December. Existing investors will receive one share of the manager for every four shares they currently hold, making it like a 1-for-4 stock split. Once complete, existing investors will own both Brookfield Corporation and Brookfield Asset Management shares.
Why dividend investors won’t want to miss this split
Brookfield’s asset management business generates a lot of distributable earnings. The company returns some of this money to shareholders via dividends and share repurchases. However, the company’s payout currently yields 1.2%, which isn’t attractive to income-seeking investors since it’s less than the S&P 500’s current 1.6% dividend yield.
Brookfield has such a low dividend yield because it retains a significant portion of its distributable cash to invest in its private equity funds and make other direct investments. These investments benefit shareholders as Brookfield collects dividend income and profits from capital appreciation. However, the market doesn’t give Brookfield full credit for the value of these investments nor the valuation of its asset management business in its stock price. The company believes its business is worth $82 to $94 per share, whereas the stock recently traded at around $45 per share.
The company hopes to unlock the value of its asset management business by splitting it off and sending a portion of it to investors. That entity will be very similar to Blackstone as a pure-play asset management company that distributes the bulk of its earnings to shareholders, primarily through a dividend. Blackstone currently pays a dividend that varies with its distributable earnings. However, it offers a much higher yield of around 5.5%.
Brookfield’s asset management business will have a similar model. It plans to pay out 90% of its annual earnings in dividends and should have a much higher dividend yield than the corporation, which will continue to retain a significant portion of its earnings to fund new investments. Meanwhile, it sees the asset manager growing the distribution at a 15% to 20% annual rate as it expands its fee-related earnings and realizes its share of the carried interest in the funds it manages. That combination of yield and growth makes it a potentially attractive option for yield-seeking investors.
A stock split that could pay big dividends
Brookfield plans to complete a unique 1-for-4 stock split early next month as it splits off a portion of its asset management business and sends it to investors. Those new shares will pay a much higher-yielding dividend that should grow at a double-digit rate. That makes the Brookfield stock split one income-focused investors won’t want to miss. They should consider buying Brookfield before the split to get some of those income-producing shares.
Matthew DiLallo has positions in Blackstone Inc. and Brookfield Asset Management and has the following options: short December 2022 $40 puts on Brookfield Asset Management. The Motley Fool has positions in and recommends Blackstone Inc., Brookfield Asset Management, and KKR. The Motley Fool recommends Brookfield Asset Management Inc. CL.A LV. The Motley Fool has a disclosure policy.
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